Analysis of Coca-Cola (KO:NYQ)

Voilà plus de six ans que je ne vous ai plus parlé d'un grand classique des growing dividends, également chouchou de W. Buffett : Coca-Cola. So, at the request of a loyal reader, I decided to unsheathe my analyst's glasses once again to review this nugget I parted with just over a year ago. Coca-Cola is quite simply the world's largest manufacturer and distributor of soft drinks. The American giant is also in the news this holiday season, since it's thanks to (or because of) him that Santa Claus is red!

Valuation & dividend

Comme la plupart des titres américains en ce moment, KO est hors de prix. C'est d'ailleurs ce qui m'avait poussé à m'en séparer, avec beaucoup de peine, en 2017. Contrairement aux autres actions, Coca-Cola n'a pas été impactée par la récente baisse des marchés. Certes, cela prouve le caractère défensif de KO, qui s'explique par son type d'activité et qui se traduit par une beta de seulement 0.6 et une volatility minime de 5.25%. Néanmoins, cette résilience n'aide pas Coca à revenir à des niveaux de valorisation plus corrects, puisqu'elle se négocie à :

• 44.17 times current recurring earnings
• 30.62 times average recurring earnings
• 481.97 times (!) tangible assets
• 12.31 times book value
• 5.93 times sales
• 38.69 times current free cash flow
• 29.07 times average free cash flow

Not only is it very expensive, but a price/sales ratio of over 3 is generally a reliable signal to sell. EBIT and EBITDA only amount to 4.2% of the enterprise value. This confirms Coca-Cola's excessive valuation at the moment.

Si l'on se focalise sur le dividende, on pourrait croire paradoxalement qu'on a affaire à un titre délaissé par le marché. Le rendement de KO se monte en effet à près de 3%, ce qui n'est pas mal du tout pour une entreprise de qualité par les temps qui courent. Coca figure d'ailleurs parmi les célèbres Dogs of the Dow, les dix titres du Dow Jones qui offrent le meilleur dividend yield. Néanmoins, je le répète encore et toujours, cet indicateur n'est pas suffisant en soi, il faut toujours voir ce qui se cache derrière ces chiffres. En effet, le dividende payé par Coca-Cola représente :

• 130,72% current recurring earnings
• 90,60% average recurring earnings
• 114,49% current free cash flow
• 86.06% average free cash flow

Coca's earnings per share have been falling for several years now, which explains why we end up with figures like these, while the dividend has been rising for the past... 55 years. Future dividend growth is therefore called into question. In fact, over the last five years, payouts have increased by an average of just 4.2% per annum. Given the historical sustainability of the dividend, I believe that the American giant will find solutions to stop the hemorrhaging of its earnings, so as not to have to lower its payouts. Nevertheless, we can't expect the dividend to rise much in the next few years.

Balance sheet & result

Dividends are rising a little, profits are falling, cash reserves are increasing very little, and asset values are tending to erode slowly over the long term. Coca-Cola has undeniably struggled to create shareholder value in recent years. This has not prevented the stock from rising by 25% over the last five years, and even more than doubling over the last ten years. Admittedly, the subprime crisis helped the stock to catch up, but there has undeniably been speculation in KO for some time now, since the share price no longer follows the trend in fundamentals.

Les réserves de liquidités sont suffisantes, avec un current ratio de 1.34 (en légère hausse) et un quick ratio de 1.25. Franchise oblige, la gross margin est très bonne, avec 62.6% (en hausse), pour une marge de free cash flow de 15.34% et une marge nette de 13.43%. Même si elle est en baisse, la rentabilité est de la même trempe que les marges, avec un ROA de 5.41%, une CFROA de 8.08% et un ROE de 27.86%. Ces deux aspects sont évidemment la grande force de KO, celle qu'apprécie d'ailleurs particulièrement W. Buffett. Ajoutons également que le géant américain est assez peu gourmand en dépenses en capital, ce qui est une autre caractéristique des franchises.

That said, the Coca-Cola of today is not the Coca-Cola of the 90s. Other notable elements of companies with a competitive advantage include overheads, goodwill and debt. Coca's share of overheads is quite high, at 60.2%, and goodwill is down. The ratio of long-term debt to assets climbs to 35.48% (up). Total debt, which has also been rising for many years, represents 2.79 times shareholders' equity, which is obviously a lot. It would take Coca 6.6 years to pay off all its debt using its average free cash flow. That's a long time, without being catastrophic, and it's mainly thanks to the American giant's excellent predisposition for generating cash. Without this, the company would undeniably have some problems.

An interesting aspect of KO is that, in addition to increasing its dividend every year, the company also buys back its shares, thereby reducing the number of shares in circulation and increasing each shareholder's share of the pie. This also goes some way to explaining why the stock continues to climb, despite rather mediocre fundamentals. Nevertheless, one might question the wisdom of buying back one's own shares when they are so expensive... it's akin to speculating on one's own future.

Conclusion

Coca-Cola is certainly no longer as attractive an investment as it was in the 90s or 2008, but it's still a great company with very comfortable margins. Its defensive qualities are also invaluable during periods of stock market turmoil. Even if its fundamentals aren't great and its debt is high, KO remains financially solid. This is confirmed by the Z-Score (Altman), which is in the green zone at 3.5. The company isn't about to go bankrupt, but we suspected as much. The F-Score (Piotroski), at 6 out of 9, confirms these good predispositions.

But as you can see, it's the price that's really the problem for the American giant at the moment. Even if we take into account that Coca's book value is mostly intangible, and even if we say to ourselves that last year was exceptionally bad, the company would be at least twice as expensive. And here I'm being kind again, taking into account these extenuating circumstances, not necessarily justified.

So, to sum up, I still think this is a stock we should part with. The price/sales indicator alone should scare us away...